Mutual Fund Loads

When is a Front-End Load NOT a Front-End Load? Answer: when the front-end load is zero.

On a previous blog post of mine about my new portfolio allocation as proposed by my advisor, I received a comment from Average Joe in regards to the MERs and the loads on these funds (CI Value Trust fund, Templeton International Stock fund, and E&P Growth Opportunities fund):

These are all loaded funds as well (ie. they are not no-load funds). You will more than likely be locked in or have to pay a penalty to get out.

I had not looked into the loads of these funds before. In my reply to the comment above, I looked up the load options for 3 three mutual funds in question in their respective prospectuses:

I had assumed these funds were all no-load but they are not, as you have pointed out. I went and looked at the prospectuses (sp?) and here’s what I found:

-CI Value Trust can be purchased and sold after 3 years for free with the low-load option. If you sell before the 3 years are up, the sales charge is 3%.
-Templeton International Stock fund can be sold after 2 years for free with the low-load option. If you sell before the 2 years are up, the sales charge is 2%.
-E&P Growth Opportunities fund can be sold after 2 years for free with the low-load option. If you sell before the 2 years are up, the sales charge is 3%.

This does not concern me too much. I would much rather be locked in to something as it will force me to stay invested, at least on the 2-3 year time scale.

In the above, I am only quoting the “low-load deferred sales charge” option. There are actually three options for these 3 funds:

  • Front-end load (or initial sales charge) option: you pay a sales commission when you buy your shares. The commission is a percentage of the amount you invest and is paid to your financial advisor.
  • Deferred sales charge:
    • Standard deferred sales charge: varies depending on the fund, but usually higher initial penalty percentage than the low-load deferred sales charge option and a longer waiting period until the load disappears, and for some funds you may switch or sell some of your units every year. The penalty charge decreases every year you stay invested in the fund.
    • Low-load deferred sales charge: lower loads compared to the standard deferred sales charge option and shorter time until the load wears off. Usually the penalty is constant rather than decreasing, then after a short period of time, becomes 0%.

I had incorrectly assumed that the low-load deferred sales charge was the cheapest option for the investor. When I asked my advisor about this, he told me how Clearsight handles mutual funds. He said that all funds are available from Clearsight on a no-load basis. They do this by doing front-end loaded funds but with a load of zero. They do have a penalty of 2% if you want to switch or sell within the first 90 days to discourage silly trading. So essentially they have access to all funds on a no-load basis. Also, he told me they get paid a 1% trailer fee from the mutual fund company.

Anyways, that’s just a long-winded way of saying front-end load does not always mean front-end load. If your advisor or his company chooses not to charge the front-end sales charge then it is essentially no-load. After years of investing by myself in TD Mutual Funds through TD’s website, I have a lot to learn about mutual fees!

6 thoughts on “Mutual Fund Loads”

  1. I switched from TD to TD Waterhouse so I could self-direct my portfolios. Almost all front-end funds are available with no load when purchased through TDW.

  2. Also good to note that the daily total expense ratios are typically lower for front end loaded funds (a.k.a. class A shares) than for the other classes (B,C, etc.) as well. Great you are able to get the front end load at zero.

  3. It does not seem surprising that in self-directed DIY portfolios there would be no front-load, but I wonder how common it is with full-service brokerages to have the front loads waived?

  4. Great job Dave. An empowered investor does his own research and keeps his advisor on his toes!

    At least now you are informed. You know that they are waiving their front end (nothing wrong with the 90 day penalty – most funds have similar penalties to avoid quick flipping) and you know how the advisor is being paid.

  5. Joe: Thanks for instigating this. I would not have inquired deeper if it wasn’t for you bringing it up.

    BTW, this is a whole other topic, but he mentioned that eventually he wants me to move to a fee-based plan. He mentioned the advantages to me. I can’t remember exactly what they were, it was totally new to me.

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